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Cablegate: Nicaraguan Economy Coasting - but Strains Are

VZCZCXRO4522
RR RUEHLMC
DE RUEHMU #2000/01 2421411
ZNY CCCCC ZZH
R 301411Z AUG 07
FM AMEMBASSY MANAGUA
TO RUEHC/SECSTATE WASHDC 1114
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHCV/AMEMBASSY CARACAS 1152
RUEHLP/AMEMBASSY LA PAZ 0190
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHLMC/MILLENNIUM CHALLENGE CORP WASHDC
RHEHNSC/NSC WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 03 MANAGUA 002000

SIPDIS

SIPDIS

STATE FOR WHA, WHA/CEN, WHA/AND, WHA/EPSC, AND EEB/TPP
TREASURY FOR SARA GRAY
USDOC FOR 4332/ITA/MAC/WH/MSIEGELMAN
3134/ITA/USFCS/OIO/WH/MKESHISHIAN/BARTHUR

E.O. 12958: DECL: 08/30/2013
TAGS: ECON PREL PGOV ETRD EPET EINV NU
SUBJECT: NICARAGUAN ECONOMY COASTING - BUT STRAINS ARE
SHOWING

REF: A. MANAGUA 1952
B. MANAGUA 1933
C. MANAGUA 1922
D. MANAGUA 1771
E. MANAGUA 1622
F. MANAGUA 1077

Classified By: Ambassador P. Trivelli for reasons 1.5 b&d.

1. (C) Summary: The Ambassador's Second Economic Roundtable
reviewed the performance of different economic sectors and
painted a picture of an economy coasting on the achievements
of the Bolanos administration, early signs of a slowdown, and
increasing strains between the GON and businesses. The
banking sector has been performing well, but bank
representatives state that corporate clients are maintaining
market positions rather than embarking on new investments.
Nicaraguan retailers expressed concern with Ortega's mixed
policy signals, but claim this has not slowed down consumer
spending. Agricultural sector representatives note that
while conflicts between and within ministries have created
uncertainty for producers, they are still expecting a strong
coffee harvest in 2007. They have doubts, however, as to
whether beef and cheese production will match 2006 record
levels. For the oil sector, Nicaragua's deal with Venezuela
has added serious challenges to selling petroleum products.
Overall, Sandinista government policies and rhetoric are
starting to take their toll on the private sector. End
Summary.

Overview
--------

2. (C) The Ambassador's Second Economic Roundtable reviewed
the performance of various sectors and revealed increasing
strains between the GON and businesses. A sector-by-sector
overview showed an economy coasting on the achievements of
the last administration and high commodity prices, but
showing early signs of a slowdown. (Sector overviews detailed
below). Almost all participants pointed to the deceleration
of the construction sector (-7.8% for 2007) as a signal that
private investors are holding back on new projects, and the
government is not carrying out infrastructure investment (Ref
B). The ongoing problems in the electricity sector, leading
to extensive black-outs, are hurting production throughout
the economy. Many participants also stated that most
businesses were waiting for the agreement with the IMF to be
signed as a signal of GON commitment to current macroeconomic
policies. They could not predict whether private sector
investment would increase once the agreement is in place in
October (Ref D).

3. (C) At the Roundtable's request, the Ambassador spoke on
USG views on the growing Nicaragua-Iran relationship, and USG
reaction to the increasingly negative Ortega rhetoric. On
both issues, the Ambassador emphasized that the USG continues
engaging the GON and trying to foster productive working
level relationships. He emphasized that he has spoken with
Foreign Minister Santos and President Ortega about the
international image Nicaragua is building, but the reception
has been lukewarm. Roundtable members were pleased to learn
that the USG has chosen not to take an antagonistic approach
with the GON. A list of Nicaraguan Roundtable participants
can be found in Paragraph 16. The next roundtable will take
place on September 19.

Banking Sector
--------------

4. (C) The banking sector has been performing well, with
deposits already surpassing 2006 highs (Ref C). Banks have
raised interest rates on savings, creating an incentive for
depositors, but cutting into the banks' margins. Private
companies are the biggest savers, leading bankers to theorize
that businesses prefer to hold more liquid positions instead
of re-supplying inventories or embarking on new investments.
The slowest area for banks is mortgage lending, as a
consequence of the slow down in housing construction.
Mortgage sales came to a halt from December 2006 to January
2007, picking-up a bit toward the middle of the year.

5. (C) So far, banks have not encountered major problems in
their relations with the new government. Banking
representatives believe that Ortega's lack of credibility in
the private sector overall, will limit his ability to
influence events in their sector. They report that their
relations with the Central Bank continue to be productive.
The bankers did highlight a worrying trend of FSLN and PLC
party members using judges appointed by their parties to
support dead-beat debtors against banks' efforts to seize
collateral.

6. (C) The bankers reported interesting developments in the
micro-finance sector. There are 300 microfinance
institutions registered in Nicaragua, 297 of which are NGO's
and three are regulated institutions. All together they
handle USD 400 million in assets, with two of the regulated
institutions handling half. Due to the non-profit nature of
the majority of the players in the sector, multiple attempts
(by the World Bank and the National Assembly) at creating a
regulatory structure have failed. Consolidation through
buy-outs and mergers is unlikely. However, as the larger
MFIs in Nicaragua become more efficient, the interest rates
they charge have declined by half in the last five years.
This should create enough competition to force many of the
small institutions to leave the market.

Retail Sector
-------------

7. (C) While Nicaraguan retailers expressed concern about
Ortega's mixed economic signals, they stated that this has
not affected the consumption habits of the average
Nicaraguan, as purchase levels remained steady. Car sales,
in particular, have been strong with an average of 22,000
units sold per year, of which half were new. Sales of
motorcycles, mostly Chinese, also increased as people shifted
from buses to personal transportation. Sales outside of
Managua (in the departments) kept pace with the capital.
Retailers pointed to both of these trends as indicators that
the lower classes were now able to access consumer credit.
They did note, however, that purchases of heavy/large items
had slackened a bit.

8. (C) As with bankers, retailers indicated that the GON has
been laissez-faire with their sector. The major bone of
contention had been a contraction in GON current spending
during the first three months of the administration.

Agricultural Sector
-------------------

9. (C) Agricultural sector representatives painted a mixed
picture. International prices for coffee and beef remain
strong, creating strong incentives for expansion in the
agricultural area. Cattle farmers seemed to be holding off
on purchasing new cows at the end of the 2006-2007 dry season
due to its unusual length and severity, especially in
northern Nicaragua. As the rainy season started, purchases
picked up, but there is disagreement as to whether cattle
purchases will match 2006's record breaking production
numbers for beef and cheese. Coffee, on the other hand, is
set for an increase in volume, reversing a two-year downward
trend. Mexican buyers are increasingly interested in
Nicaraguan, beef, milk, and coffee, some even considering
setting up processing plants in Nicaragua.

10. (C) From the agri-business point of view, Ortega's
agricultural policies have been confusing at best. Conflicts
between and within ministries have resulted in mixed signals
and convoluted policies, which are affecting producers'
investment decisions. They do not believe that Ortega has
delegated decision making power to the majority of his
economic ministers. Agricultural sector representatives feel
this confusion provides a good opportunity for the private
sector to advise the GON on more effective policy. However,
disunity in the private sector has resulted in an opportunity
lost.

Oil Sector
----------

11. (C) Nicaragua's oil deal with Venezuela has created
several challenges to selling petroleum products in Nicaragua
(Refs A and C). Sector Representatives state that Nicaragua
consumes about 28,000 barrels of oil products a day and
Esso's refinery, the only one in Nicaragua, supplies 18,000
barrels of that demand. Nicaragua's storage infrastructure
is built to handle this modest demand, not the 274,000
barrels a day Chavez has promised (100 million barrels a
year). Although the shipments from Venezuela have not come
close to meeting Chavez' promises, they have been large
enough to top out existing storage capacity. As a result the
GON has tried to convince Esso to receive the Venezuelan
refined petroleum products on at least two separate
occasions. (Note: This meeting took place before the Esso
storage tank seizures detailed in Ref A. End note.)

Venezuela Tid-Bits
------------------

12. (C) One of the banking representatives had just returned
from a trip to Bolivia "to see what was going to happen in
Nicaragua." He reported that in Bolivia, Venezuelan banks -
private on paper but owned by Chavez' cronies and subsidized
by the BRV Treasury ) have distorted the market by lending
at much cheaper rates than Bolivian banks. As a result,
several Bolivian banks have failed, leaving the Venezuelan
banks in a much stronger position.
13. (C) The oil sector representatives stated that while
Venezuela and Nicaragua are publicly moving ahead with the
oil refinery plan (a plant to process up to 150,000 barrels a
day), in reality, PDVSA has only put up the money for a
feasibility study.

14. (C) In a final note, one of the retailers declared
Venezuelan urea imports to be "a disaster." The urea is
coming in at USD 15 per 100 kilo bag, below the Nicaraguan
market price of USD 22. The price difference has led private
sector suppliers to cut back on their imports. Moreover, 80%
of the urea reportedly ended up in Costa Rica via
arbitrageurs resulting in spot shortages in the Nicaraguan
market.

Comment
-------

15. (C) This meeting revealed increasing worries about
Ortega's economic policies in Nicaragua's private sector.
While the economy continues to coast on the growth created by
Bolanos government, Sandinista government policies and
rhetoric are starting to take their toll. Business leaders
seem to be focused on solidifying their current market
positions instead of expanding their businesses. While the
Sandinistas have stayed out of non-energy sector businesses,
the representatives felt it was only a matter of time before
they started looking around for new sources of income. End
comment.

16. (C) Nicaragua Private Sector Participants:

Luciano Astorga, General Manager, Bank of Central
America (BAC), Nicaragua (49.9% owned by GE Financial)

Ricardo Teran, President/CEO - Corporacion Roberto
Teran (Kodak, HP representatives)

Felipe Mantica, Operations Manager - Grupo Mantica
(Supermarkets)

Mario Alonso, Former President of the Central Bank

Joaquim de Magalhaes, General Manager, Esso Nicaragua

Gabriel Solorzano, President, FINDESA
(Second largest Micro-Finance in Nicaragua)

Roberto Bendana, cattle rancher and coffee grower.
TRIVELLI

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